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Restaurant Loans – Financing a Restaurant

Financing a Restaurant

Younger generations today are viewing eating out as a necessity, not a luxury like it was considered for years – and it’s not like these college debt ridden millennials have a ton of money either. What this means for the ever-evolving restaurant industry is that a revolution is coming, and if restaurant owners want to continue to see increased profits in this competitive market, they must adapt to the trends shaped by consumer demands and preferences. The restaurant industry is also starting to become heavily influenced by the newest generation – Generation Z. Gen Z’ers are at the age that they are choosing their preferences and forming brand loyalties. With the focus of the restaurant industry starting to encompass more than just Millennials, the restaurant industry will also need to take a more hands on approach when it comes to incorporating technology into their businesses – if any restaurant owner out there thought Millennial’s were technology driven, just wait for the wave of technology dependent Generation Z’ers starting to shift consumer preferences.

Before we go into the top restaurant industry trends that are completely shifting every aspect of the restaurant industry, we must first discuss the topic that is on every restaurant business owner’s mind today – the prediction of what is being called a “restaurant recession”. 2016 was actually a pretty good year for the restaurant industry. The restaurant industry sales were over $782 billion with over 1 million restaurant locations in the United States. The restaurant industry also employed over 14 million people, with an expected growth of 1.7 million new restaurant jobs to be created by the year 2026 – this means that as of 2016, 10 percent of the overall United States workforce is from the restaurant industry. The Bureau of Labor Statistics also showed that the tenure of restaurant employees that have been with the same restaurant employer remains above pre-recession levels, being only slightly down from 2014. So why is there all this commotion about a possible restaurant recession in the upcoming years?

The most important fact that restaurant owners need to remember is that the predicted restaurant recession is predominately starting to affect the big restaurant chains. There have been disappointing store sales and location closures for many well-known restaurant chains: Burger King, Chipotle, McDonald’s, Shake Shack, and Wendy’s to name a few. This idea of a restaurant recession could still pose some potential problems for smaller and medium sized restaurants as well. Simply put, there are too many restaurants in the United States; in addition to this, wage inflation that is taking root in many states will start to affect the traditional way of operating financial costs of a restaurant. There is also the increased competition between restaurants and grocery stores now that grocery stores offer fresh, hot meals to go (such as Whole Foods). But do not fret! There is still hope for the restaurant owners out there looking to stay ahead of the competition and survive this ominous restaurant recession.

Restaurant Trends

There are expected troubles ahead for the restaurant industry in the next few months, but many analysts believe that the restaurant owners willing to adopt all of the emerging technological trends, as well as putting a major focus on consumer preferences and demands, will have no issues when this so called “restaurant recession” hits.

  • Technology and the Internet of Things: There are endless amounts of technological solutions to enhance consumer dining experiences, as well as technological software’s that can only increase profitability, ease, and efficiency for back of the house needs. For starters, many restaurants are starting to incorporate mobile ordering, delivery, customization, and payment strategies. Many restaurant owners are also seeing tablets and mobile ordering as a way to ease the payroll budget with inflating minimum wages. For restaurant owners and employees, new, top of the line Point of Sale systems are being implemented to speed up customer wait times, all while creating a more effective back of the house system. Implementing cloud based services and systems for day to day operations are also helping to increase profitability for many restaurant owners.
  • Marketing and Social Media: 2015 and 2016 are now well known for the era of photographing everything we eat. Why? Who the heck knows – but that’s how younger generations dominated by social media operate. While this trend is incredibly odd, it is actually a simple, free, and easy way to market a restaurant. Think of the amount of people that take a photo of their delicious looking plate on a busy Friday night, each of them having at least 100 friends (per social media account). This only helps to boost sales. Marketing through social media is also a bigger niche that restaurant owners need to be more engaged in; it is largely untapped in the restaurant industry. Mobile apps are another important aspect of drawing in more loyal consumers.
  • Local Businesses: The number one word that should be at the forefront of every restaurant owner’s mind is. As mentioned above, the restaurant chain industry is taking some serious hits right now, but many believe that it is largely in part due to the consumer demands of locality. Consumers today want to know where their food is coming from, they want to know if it is environmental friendly and sustainably produced, they want to know that a restaurant can customize local food to their crazy diet, and consumers more than anything want to support their local businesses.
  • Farm to Table, Locavores, and Partnerships: Whether your restaurant is buying produce and meat from local farms, or even growing your own food on the rooftop, editing the menu to incorporate more locally sourced food will be key to staying ahead in this competitive industry. Catering to locavores is no longer avoidable. Many successful restaurant owners are even collaborating with other local bakeries, specialty shops, and restaurants. For example, a restaurant needs bread soup bowls, so why not partner with the local bread bakery down the street? Local is the number one demand from consumers today.
  • Going Green: In addition to focusing on catering to locavores, another major consumer preference today is sustainable food practices and organic, environmentally friendly food choices. The environmental crisis our world is facing has sparked the interest of consumers everywhere, making environmentally friendly products a requirement in all industries today.
  • Consumer Preferences and Spending: Obviously, consumer spending is directly correlated to consumer preferences; with increased disposable income for the average person today, focusing on every consumer demand and preference is key in competing in the restaurant industry. Focusing on niche ideas that cater to creating a stellar experience for consumers today is important to avoid the pitfalls of the oncoming restaurant recession.

When Would a Restaurant Require Financing?

There are endless amounts of reasons why a restaurant owner would consider different finance options, especially with the prediction of the restaurant recession. Many restaurant owners are paying extremely high rent prices to be in the ultimate location for increased profitability, but sometimes covering this unavoidable cost can be difficult. On the flip side, a restaurant owner that is seeing positive sales may consider expanding or renovating their restaurant? Yep, there is a loan option for that too! Other financing needs for restaurant owners include working capital, marketing and advertising costs, inventory, hiring new employees, covering payroll costs, and equipment financing. Considering the variety of loan possibilities could help any restaurant business owner when they need it most!

Types of Restaurant Loans

Types Rates Terms Funding
Bank 6-10% 3-7 years 14-30 days
SBA 6-10% 3-7 years 10-30 days
Line of Credit 5-15% 1 – 3 years 7-30 days
Alternative 6-25% 1-5 years 5-7 days
 Cash Advance 1.16-1.55 3-24 months 1-3 days

Restaurant Bank Loans

Traditional bank term loans and business lines-of-credit usually offer the best rates and terms of all types of small business loans available to restaurant business owners.
The problem most restaurants have in getting a small business loan through a traditional bank is the fact the banks tend to lend to the most creditworthy and established of small businesses and restaurants. If you are able to get a restaurant loan through a bank, you will tend to see terms in 3, 5, 7 and 10 year terms or more.

  • Rates: 5-10%
  • Terms: 1-25 years

Restaurant SBA Loans

SBA loans to the restaurant industry is the most approved of all industries, offering among the best rates available of all business loans (terms for an SBA loan are in the 6-8% range). One major advantage of going the SBA route is the fact that SBA loans are more enticing to some lenders because the banks have less risk (because the SBA guarantees a portion of the loan if the restaurant owner defaults). But, SBA lenders generally require a credit score above 650, so good credit is required. Typical loan terms to restaurants can be up to 25 years depending on use of proceeds of the business. Typical use-of-proceeds for SBA financing to restaurants include working capital, refinancing the restaurant’s debt, purchasing restaurant real estate, purchase restaurant equipment, dining furniture, fixtures and other restaurant supplies or materials.

  • Rates: 6-8%
  • Terms: 7-25 years

Alternative Restaurant Loans

For restaurant owners that don’t qualify for traditional bank loans (and SBA loans) but don’t want to pay the extremely high interest rates of Merchant Cash Advance business loans, a mid-prime alternative loan may be right for you, as rates are usually in the 9-20% for most restaurant owners. This type of alternative financing has grown in recent years as a new generation of non-bank lenders has begun to fill a space vacated by banks over the past 20 years. Midprime alternative business lenders usually require a credit score above 600. Loan terms of midprime alternative business loans are usually in the 18 month to 5 year range. Typical use-of-proceeds for a restaurant include working capital, refinancing the restaurant’s debt, purchase restaurant equipment, dining furniture, fixtures, etc..

  • Rates: 9-25%
  • Terms: 1-5 years

Restaurant Equipment Leasing

Leasing the restaurant equipment can allow the restaurant owner to get the equipment needed to keep the restaurant running, without having to pay the full cost of the equipment upfront. But since you are leasing the equipment, you will end up paying even more than you would by buying the restaurant equipment. Restaurants always need equipment — that’s a fact. But paying the full-cost of the restuarant equipment can be prohibitive for many small business owners to are strapped for cash.

  • Rates: 5-25%
  • Terms: 1-10 years

Restaurant Merchant Cash Advance

Restaurants process lots of debit and credit card transactions daily. Restaurants can use that cash-flow to sell their future revenue in exchange for immediate cash. A merchant cash advance (and business cash advance) is the sale of future deposits in exchange for financing.

  • Factor Rates: 1.16-1.50%
  • Terms: 4 months – 2 years

Leveraging Stocks For Financing

But, if you have stocks, you can leverage the value of the stock to get a line-of-credit to help funding your restaurant. Typical rates for a stock loan is 2-4 points above LIBOR and the funds are revolving. For your stocks to qualify for this securities-based lending, they generally need to trade above $5. Looking to get startup funding for a restaurant? Good luck. That can be the toughest of all funding to find, and nearly impossible through a traditional bank.

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